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Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 1 / 38
Chapter summary
Chapter summary
Approaches to studying multiple life models:
define multiple states
traditional approach (use joint random variables)
Statuses:
joint life status
last-survivor status
Insurances and annuities involving multiple lives
evaluation using special mortality laws
µ02
x+t:y+t µ13
x+t
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 3 / 38
Approaches joint future lifetimes
Consider the case of two lives currently ages x and y with respective
future lifetimes Tx and Ty .
Joint cumulative dist. function: FTx Ty (s, t) = Pr[Tx ≤ s, Ty ≤ t]
independence: FTx Ty (s, t) = Pr[Tx ≤ s] × Pr[Ty ≤ t] = Fx (s) × Fy (t)
∂ 2 FTx Ty (s,t)
Joint density function: fTx Ty (s, t) = ∂s∂t
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 4 / 38
Approaches illustration
Illustrative example 1
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 5 / 38
Statuses joint life status
where tpxy = Pr[Tx > t, Ty > t] = STxy (t) is the probability that both
lives (x) and (y) survive after t years.
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 6 / 38
Statuses joint life status
Txy + Txy = Tx + Ty
Txy · Txy = Tx · Ty
Txy
a + aTxy = aTx + aTy
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 8 / 38
Statuses distribution
Distribution of Txy
Recall method of inclusion-exclusion of probability:
Pr[A ∪ B] + Pr[A ∩ B] = Pr[A] + Pr[B].
Choose events A = {Tx ≤ t} and B = {Ty ≤ t} so that
A ∪ B = {Txy ≤ t} and A ∩ B = {Txy ≤ t}.
This leads us to the following useful relationships:
FTxy (t) + FTxy (t) = Fx (t) + Fy (t)
STxy (t) + STxy (t) = Sx (t) + Sy (t)
tpxy + tpxy = tpx + tpy
fTxy (t) + fTxy (t) = fx (t) + fy (t)
These relationships lead us to finding distributions of Txy , e.g.
FTxy (t) = Fx (t) + Fy (t) − FTxy (t) = FTx Ty (t, t)
which is obvious from FTxy (t) = Pr[Tx ≤ t ∩ Ty ≤ t].
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 9 / 38
Statuses distribution
Interpretation of probabilities
Note that:
tpxy is the probability that both lives (x) and (y) will be alive after t
years.
tpxy is the probability that at least one of lives (x) and (y) will be alive
after t years.
In contrast:
t qxy is the probability that at least one of lives (x) and (y) will be dead
within t years.
t qxy is the probability that both lives (x) and (y) will be dead within t
years.
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 10 / 38
Statuses illustration
Illustrative example 2
and
qx+1 = 0.06 and qy+1 = 0.12.
Deaths are assumed to be uniformly distributed over each year of age.
Calculate and interpret the following probabilities:
0.75 qxy
1
1.5 qxy
2
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 11 / 38
Force of mortality joint life
The force of mortality of the joint life status is the sum of the
individuals’ force of mortality, when lives are independent.
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 12 / 38
Force of mortality last-survivor
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 13 / 38
Insurance benefits discrete
Status u could be any joint life or last survivor status e.g. xy, xy.
Then
the time at which the benefit is paid: Ku + 1
the present value (at issue) of the benefit: Z = v Ku +1
∞
X
APV of benefits: E[Z] = Au = v k+1 · Pr[Ku = k]
k=0
2 2
variance: Var[Z] = Au − (Au )
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 14 / 38
Insurance benefits continuous
Status u could be any joint life or last survivor status e.g. xy, xy.
Then
the time at which the benefit is paid: Tu
the present value (at issue) of the benefit: Z = v Tu
Z ∞
APV of benefits: E[Z] = Āu = v t · tpu · µu+t dt
0
2 2
variance: Var[Z] = Āu − (Āu )
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 15 / 38
Insurance benefits continuous
Some illustrations
For a joint life status (xy), consider whole life insurance providing
benefits at the first death:
X∞ ∞
X
Axy = v k+1 · k|qxy = v k+1 · kpxy · qx+k:y+k
k=0 k=0
Z ∞
Āxy = v t · tpxy · µx+t:y+t dt
0
For a last-survivor status (xy), consider whole life insurance providing
benefits upon the last death:
X∞ ∞
X
k+1
Axy = v · k|qxy = v k+1 · (k|qx + k|qy − k|qxy )
k=0 k=0
Z ∞
Āxy = v t · tpxy · µx+t:y+t dt
Z0 ∞
v t tpx · µx+t + tpy · µy+t − tpxy · µx+t:y+t dt
=
0
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 16 / 38
Insurance benefits continuous
- continued
Useful relationships:
Axy + Axy = Ax + Ay
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 17 / 38
Annuity benefits discrete
ä n , Ku ≥ n
Pn−1
APV of benefits: E[Y ] = äu: n = k=0 ä k+1 · k| qu + ä n · npu
1 h 2 i
variance: Var[Y ] = 2 2Au: n − Au: n
d
Other ways to write APV:
n−1
X 1
v k · kpu =
äu: n = 1 − Au: n .
d
k=0
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 18 / 38
Annuity benefits continuous
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 19 / 38
Annuity benefits continuous
Some illustrations
For joint life status (xy), consider a whole life annuity providing
benefits until the first death:
∞
X Z ∞
äxy = v k · kpxy and āxy = v t · tpxy dt
k=0 0
For last survivor status (xy), consider a whole life insurance providing
benefits upon the last death:
X∞ Z ∞
k
äxy = v · kpxy and āxy = v t · tpxy dt
k=0 0
Useful relationships:
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 20 / 38
Annuity benefits continuous
Type of life annuity Single life x Joint life status xy Last survivor status xy
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 21 / 38
Annuity benefits continuous
Type of life insurance Single life x Joint life status xy Last survivor status xy
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 22 / 38
Annuity benefits continuous
Illustrative example 3
Calculate Ā45:65 .
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 23 / 38
Contingent functions
Contingent functions
It is possible to compute probabilities, insurances and annuities based
on the failure of the status that is contingent on the order of the
deaths of the members in the group, e.g. (x) dies before (y).
These are called contingent functions.
Consider the probability that (x) fails before (y) - assuming
independence:
Z ∞
Pr[Tx < Ty ] = fTx (t) · STy (t)dt
Z0 ∞
= tpx µx+t · tpy dt
Z0 ∞
= tpxy µx+t dt
0
- continued
The probability that (x) dies before (y) and within n years is given by
Z n
1
n qxy = tpxy µx+t dt.
0
Similarly, we have the probability that (y) dies before (x) and within
n years: Z n
1
n qxy = tpxy µy+t dt.
0
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 25 / 38
Contingent functions illustration
Illustrative example 4
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 26 / 38
Reversionary annuities
Reversionary annuities
A reversionary annuity is an annuity which commences upon the failure of
a given status (u) if a second status (v) is then alive, and continues
thereafter so long as status (v) remains alive.
Consider the simplest form: an annuity of $1 per year payable
continuously to a life now aged x, commencing at the moment of
death of (y) - briefly annuity to (x) after (y).
APV for this reversionary annuity:
Z ∞
āy|x = v t tpxy µy+t āx+t dt.
0
One can show the more intuitive formula (using current payment
technique):
Z ∞
v t tpx 1 − tpy dt = āx − āxy .
āy|x =
0
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 27 / 38
Reversionary annuities
For the reversionary annuity considered in the previous slides, one can
also write the present-value random variable at issue as:
(
ā
Ty | Tx −Ty
, Ty ≤ Tx
Z =
0, Ty > Tx
(
ā T − ā T , Ty ≤ Tx
= x y
0, Ty > Tx
= ā T − ā T .
x xy
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 28 / 38
Reversionary annuities
If (v) is the term-certain ( n ) and (u) is the single life (x), then
a n |x = ax − ax : n
which is indeed a single-life deferred annuity.
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 29 / 38
Multiple state framework probabilities
tpxy = tp00
xy
t qxy = tp01 02 03
xy + tpxy + tpxy
tpxy = tp00 01 02
xy + tpxy + tpxy
t qxy = tp03
xy
t qxy = tp03
xy
Z t
1 00 02
t qxy = spxy µx+s:y+s ds
0
Z t
01
2
t qxy = spxy µ13
x+s ds
0
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 30 / 38
Multiple state framework annuities
Annuities
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 31 / 38
Multiple state framework insurances
Insurances
In terms of insurance functions, the following should also be
straightforward to verify:
Z ∞
e−δt tp00 01 02
Āxy = xy µx+t:y+t + µx+t:y+t dt
0
Z ∞
e−δt tp01 13 02 23
Āxy = xy µx+t + tpxy µy+t dt
0
Z ∞
Ā1xy = e−δt tp00 02
xy µx+t:y+t dt
0
Z ∞
Ā2xy = e−δt tp01 13
xy µx+t dt
0
µm
x+t µm
x+t
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 33 / 38
Illustrations
Illustrative example 5
Suppose that the future lifetimes, Tx and Ty , of a husband and wife,
respectively are independent and each is uniformly distributed on [0, 50].
Assume δ = 5%.
1 A special insurance pays $1 upon the death of the husband, provided
that he dies first. Calculate the actuarial present value for this
insurance and the variance of the present value.
2 An insurance pays $1 at the moment of the husband’s death if he dies
first and $2 if he dies after his wife. Calculate the APV of the benefit
for this insurance.
3 An insurance pays $1 at the moment of the husband’s death if he dies
first and $2 at the moment of the wife’s death if she dies after her
husband. Calculate the APV of the benefit for this insurance.
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 34 / 38
Illustrations
Illustrative example 6
For a husband and wife with ages x and y, respectively, you are given:
µx+t = 0.02 for all t > 0
µy+t = 0.01 for all t > 0
δ = 0.04
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 35 / 38
Illustrations
For (x) and (y) with independent future lifetimes, you are given:
āx = 10.06
āy = 11.95
āxy = 12.59
Āxy1 = 0.09
δ = 0.07
Calculate Ā1xy .
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 36 / 38
Common shock model
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 37 / 38
Common shock model
The joint mortality of two lines (x) and (y) is being modeled as a multiple
state model with a common shock (see diagram in the previous page).
You are given:
µ01 = 0.010
µ02 = 0.030
µ03 = 0.005
δ = 0.05
Lecture: Weeks 9-10 (STT 456) Multiple Life Models Spring 2015 - Valdez 38 / 38